In his latest quarterly Economic Outlook, Neil Williams, Group Chief Economist at Hermes Investment Management, believes that markets are taking more than a ‘glass half full’ view of the macro outlook, with little consideration of the new risk emerging. In the short term, this makes sense, he says, as speculation, rightly, that major economies will open the fiscal box is sparking ‘reflation trades’.

Could be a year of two halves...Yet, while better for growth, markets are ignoring the darker cloud looming. Rather than financial distrust, we may need to brace for political distrust, with the threat of beggar-thy-neighbour policies - from the US to anti-European populism - rising.

In which case, markets face a year of two halves, where stimulus-euphoria gradually gives way to stagflation concern. Helpfully, the trade-off though, is that policy rates stay lower than many expect.

Without care, an unhelpful jigsaw piece from the 1930s - retaliatory trade protectionism - might come crashing into place. In 1930, it was triggered by the Smoot-Hawley reforms that raised US tariffs to up to 20% on over 20,000 imported goods. This impacted the US’s relatively smaller number of trading partners (predominantly Canada, Europe), and prolonged the depression.

Impact of protectionism could be more complicated than in the 1930s...Congress this time may push back on a general approach. Yet, Mr Trump could still invoke ‘Super 301’ to impose tariffs without its or WTO approval, on countries deemed (by him) to be engaging in “unfair” trade practices against the US.

The impact of protectionism this time could be far more complicated than in the 1930s. First, the economic and financial linkages suggest the knock-on would be more far reaching. Global retaliation would activate second-round effects that later offset the initial growth-impulse from Mr Trump’s tax cuts.

Second, the deflationary return to the US could thus be much larger than anticipated. China’s commitment to US Treasuries would be questioned, supply chains for US corporates disrupted, and the US’s already shrinking labour supply and potential growth reduced further.

Third, should protectionism build, inflation will reappear. But, with the possible exception of the US facing labour shortages, it’ll be the ‘wrong sort’ – cost, rather than demand-led. Central banks will ‘turn a blind’ eye as economies stagflate, so the inflation flame may snuff itself out.

Too soon for the ‘great rotation’...And, this comes on top of monetary expansion. Central banks still daren’t lift the tide of liquidity hiding the sharp rocks beneath. Real rates will stay negative, with peak rates lower than we’re used to, and central banks unable to turn off their taps without unintended consequences.

In which case, ‘lower for longer’ will continue. And, chasing the ‘great rotation’ of an en masse shift out of government bonds means taking on the central banks. So, for investors, the quest for yield - even in 2018, ten years after the pit of the crisis - will persist.